Private Pensions: Better Agency Coordination Could Help Small Employers Address Challenges To Plan Sponsorship

Published by the Government Accountability Office on 2012-03-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            United States Government Accountability Office

GAO                         Testimony
                            Before the Special Committee on Aging,
                            U.S. Senate

                            PRIVATE PENSIONS
For Release on Delivery
Expected at 2:00 p.m. EST
Wednesday, March 7, 2012

                            Better Agency Coordination
                            Could Help Small
                            Employers Address
                            Challenges To Plan
                            Statement of Charles A. Jeszeck, Director
                            Education, Workforce, and Income Security

Chairman Kohl, Ranking Member Corker, and Members of the

I am pleased to be here today to discuss the challenges that small
employers face when sponsoring retirement plans for their workers. About
42 million workers, or about one third of all private-sector employees,
work for employers with less than 100 employees and recent federal data
suggest many of these workers lack access to a work-based retirement
plan to save for retirement. An estimated 51 to 71 percent of workers at
employers with less than 100 workers do not have access to a work-
based retirement plan, compared to an estimated 19 to 35 percent of
those that work for employers with 100 or more workers. Small employers
face a number of barriers to starting and maintaining a plan for their
workers. Certain characteristics associated with small employers may
contribute to the challenges of sponsoring a plan. For example, in 2008,
we reported on challenges that can limit small employer sponsorship of
Individual Retirement Arrangement 1 (IRA) plans, including administrative
costs, contribution requirements, and eligibility based on employee tenure
and compensation, among others. 2 Additionally, federal data suggest that
about half of all new businesses (nearly all of which are small) do not
survive for more than 5 years.

My statement is based on our report released today that examines (1) the
characteristics associated with small employers that are more or less
likely to sponsor a retirement plan, (2) challenges small employers face in
establishing and maintaining a retirement plan, and (3) options that exist
to address those challenges and increase small employer sponsorship. 3

To answer these objectives, we combined and analyzed retirement plan
data from the Department of Labor (Labor) and the Internal Revenue
Service (IRS) employer data to produce a regression analysis and

 An IRA is a personal savings arrangement that offers certain tax advantages. IRAs may
include individual retirement accounts and individual retirement annuities.
 GAO, Individual Retirement Accounts: Government Actions Could Encourage More
Employers to Offer IRAs to Employees, GAO-08-590 (Washington, D.C.: June 4, 2008).
 GAO, Private Pensions: Better Agency Coordination Could Help Small Employers
Address Challenges to Plan Sponsorship, GAO-12-326 (Washington, D.C.: March 5,

Page 1                                                                     GAO-12-459T
             descriptive statistics on 5.3 million small employers. 4 We conducted
             literature reviews and interviewed groups of small employers in five cities 5
             as well as other stakeholders. 6 We conducted our work in accordance
             with generally accepted government auditing standards from October
             2010 to March 2012. More complete information on our scope and
             methodology is available in our issued report.

             In summary, we found that the likelihood that a small employer will
             sponsor a retirement plan largely depends on the size of the employer’s
             workforce and the workers’ average wages. Small employers, retirement
             experts, and other stakeholders also identified a number of challenges—
             such as plan complexity and resource constraints—to starting and
             maintaining retirement plans. In addition, stakeholders offered options for
             addressing some challenges to plan sponsorship, which included
             simplifying federal requirements for plan administration and increasing the
             tax credit for plan startup costs. Although Labor, IRS, and the Small
             Business Administration (SBA) collaborate in conducting education and
             outreach on retirement plans, agencies disseminate information online
             through separate websites and in a largely uncoordinated fashion. In
             addition, IRS currently does not have the means to collect information on
             employers that sponsor a certain type of IRA plan. As a result of our
             findings, we are recommending efforts for greater collaboration among
             federal agencies to foster small employer plan sponsorship and more
             complete collection of IRA plan sponsorship data.

             To encourage employers to sponsor retirement plans for their employees,
Background   the federal government provides preferential tax treatment under the
             Internal Revenue Code (IRC) for plans that meet certain requirements. In
             addition, the Employee Retirement Income Security Act of 1974 (ERISA),
             as amended, sets forth certain protections for participants in private-
             sector retirement plans, including fiduciary responsibilities that may apply

              For the purposes of this study, GAO defined a small employer as a for-profit firm with at
             least 1 employee and no more than 100 employees.
             The five cities were Atlanta, Boston, Chicago, Los Angeles, and Washington, D.C.
              Other stakeholders included retirement experts, organizations representing small
             employers, retirement plan service providers, representatives of the accounting
             profession, and officials at Labor and IRS.

             Page 2                                                                         GAO-12-459T
to plan sponsors, which establish certain standards of conduct for those
that manage employee benefit plans and their assets. 7

Small employers may choose a plan for their employees from one of three
categories: employer-sponsored IRA plans; defined contribution (DC)
plans; and defined benefit (DB) plans (often referred to as traditional
pension plans). 8 Employer-sponsored IRA plans, which can be either
Savings Incentive Match Plans for Employees (SIMPLE) or Simplified
Employee Pension (SEP) plans, generally allow employers and, in SIMPLE
IRA plans, employees, to make contributions to separate IRA accounts for
each participating employee. Employers generally have fewer
administration and reporting requirements compared to other types of
plans. The second plan category—DC plans—which includes 401(k) plans,
allows employers, employees, or both to contribute to individual employee
accounts within the plan. DC plans tend to have higher contribution limits
for employees than employer-sponsored IRA plans; however, they also
have more reporting requirements and other rules; for example, they may
be subject to requirements for nondiscrimination testing or top-heavy
testing.9 The third category is DB plans, which promise to provide a
specified retirement benefit to employees; the employer is generally
responsible for funding the plan. 10

Over the years, Congress has responded to concerns about lack of
access to employer-sponsored retirement plans for employees of small
employers with legislation to lower costs, simplify requirements, and ease
administrative burden. For example, the Revenue Act of 1978 and the
Small Business Job Protection Act of 1996 established the SEP IRA plan

 Pub. L. No. 93-406, 88 Stat. 829. Plan sponsors assume fiduciary responsibilities to the
extent they qualify as fiduciaries as defined by ERISA. See 29 U.S.C. §§ 1002(21),
 For more information and the sources of the requirements for these plans, see GAO-12-
 Some plans may be required to conduct annual nondiscrimination testing to ensure that
the contributions or benefits do not discriminate against rank-and-file workers in favor of
highly compensated employees. See 26 U.S.C. § 401(a)(4). Top-heavy testing may also
be required to ensure a minimum level of benefits are provided to rank-and-file workers in
plans sponsored by owner-dominated businesses, where the majority of benefits accrue to
“key” employees such as owners and top executives. See 26 U.S.C. § 416.
  The retirement benefit provided by DB plans is often calculated based on factors such
as the employee’s length of service and pay.

Page 3                                                                        GAO-12-459T
and the SIMPLE IRA plan respectively, featuring fewer administration
requirements than other plan types. The Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) also included a number of
provisions that affected small employers, which were made permanent by
the Pension Protection Act of 2006 (PPA). The PPA also established
additional provisions that support retirement plan participation by rank-
and-file employees, such as automatic enrollment.

Federal agencies also play a role in fostering retirement plan sponsorship
by small employers. To help encourage sponsorship, federal agencies
conduct education and outreach activities and provide information about
retirement plans for small employers. Labor, IRS, and SBA—which
maintains an extensive network of field offices—have collaborated with
each other and with national and local organizations to develop
information on small employers retirement plans and conduct outreach
with small employers.

Various private-sector service providers—from individual accountants,
investment advisers, recordkeepers, and actuaries to insurance
companies and banks—assist sponsors with their retirement plans. Some
sponsors hire a single provider that offers a range of plan services for one
fee, sometimes referred to as a “bundled” services arrangement. Other
sponsors hire different providers for individual services under an
“unbundled” arrangement, paying a separate fee for each service. Plan
services include legal, accounting, trustee/custodial, recordkeeping,
actuarial (for defined benefit plans), investment management, investment
education, or advice. Service providers can also assist with plan
administration functions, including any required testing and filing of
government reports.

Page 4                                                           GAO-12-459T
Number of Employees
and Average Pay Level
Greatly Influence Plan

More Employees and           We found that the number of employees and average wages greatly
Higher Average Wages         influence the likelihood that a small employer will sponsor a retirement
Increase the Likelihood of   plan. 11 Further, our regression analysis using Labor and IRS data found
                             that small employers with larger numbers of employees were the most
Plan Sponsorship
                             likely of all small employers to sponsor a plan, as were those paying
                             average annual wages of $50,000-$99,999. Conversely, employers with
                             the fewest employees and the lowest average annual wages were very
                             unlikely to sponsor a plan.

                             A separate analysis we conducted using Labor and IRS data found an
                             overall small employer sponsorship rate of 14 percent in 2009. 12 It is
                             important to note, however, that this sponsorship rate does not include
                             small employers that sponsor SEP IRA plans because IRS currently does
                             not have a means to collect data on employers that sponsor this plan

                             Further examination found that small employers with 26 to 100
                             employees had the highest sponsorship rate—31 percent—while small
                             employers with 1 to 4 employees had the lowest rate—5 percent
                             (See fig 1).

                               Several experts stated that a firm’s age could also affect the likelihood of plan
                             sponsorship, with newer employers less likely to sponsor a plan. However, our analysis
                             was unable to address the number of years in operation due to technical challenges. For
                             further discussion of the technical challenges, see GAO-12-326.
                               The sponsorship rate cited in this testimony is limited to single employers that sponsor a
                             plan. Consequently, the rate does not include small employers that participated only in
                             multiple employer plans or multiemployer plans, which are outside the scope of this study.
                             We are currently conducting ongoing work on these plan types and their role in the private
                             pension system.

                             Page 5                                                                         GAO-12-459T
Figure 1: Small Employer Plan Sponsorship by Number of Employees in 2009

In our examination of average annual wage characteristics, small
employers with average annual wages of $50,000 to $99,999 had the
highest rate of plan sponsorship at 34 percent while small employers with
average wages of under $10,000 had the lowest sponsorship rate—3
percent. In examining the interaction between both characteristics—the
number of employees and average annual wages—we found that the
sponsorship rate for small employers with 26 to 100 employees exceeded
75 percent when average wages were $50,000 or more. In contrast, small
employers with one to four employees reached their highest sponsorship
rate of 13 percent when average annual wages were $50,000 or more.

We also found differences in sponsorship rates in different parts of the
country, and found small employers in the Midwest and Northeast were
more likely to sponsor plans while employers in the West and South were
less likely. 13 Connecticut, Wisconsin, and Washington, D.C. had the
highest sponsorship rates—with Washington, D.C., showing the top rate
of 23 percent. Mississippi and Florida had the lowest sponsorship rates at
fewer than 10 percent (see fig 2).

 For purposes of this analysis, we used Census Bureau geographic regions.

Page 6                                                                      GAO-12-459T
Figure 2: Small Employer Plan Sponsorship by State in 2009

401(k)s and SIMPLE IRAs                 According to our analysis of Labor and IRS data, 401(k) and SIMPLE IRA
Were the Most Common                    plans were overwhelmingly the most common types of plans sponsored
Plan Types                              by small employers. Out of slightly more than 712,000 small employers
                                        that sponsored a single type of plan, about 86 percent sponsored either a
                                        401(k) or a SIMPLE IRA plan. 14 Figure 3 shows the proportion of plan
                                        types sponsored by small employers.

                                          Three percent of the small employer population sponsored more than one plan;
                                        however, these small employers were excluded from our plan type analysis to avoid
                                        double counting plans.

                                        Page 7                                                                     GAO-12-459T
Figure 3: Small Employer Plan Sponsorship by Plan Type in 2009

Notes: Percentages in figure do not add up to 100 due to rounding.
A SARSEP plan is a type of SEP IRA plan set up before 1997 that permits employee salary reduction
contributions. Employee salary reductions under SEP IRA plans were eliminated beginning in 1997;
however, SARSEP plans established prior to 1997 may continue to offer salary reductions. 26 U.S.C.
§ 408(k)(6)(H).

While SIMPLE IRA plans were the most common plan type along with
401(k) plans, they made up a smaller proportion of overall contributions.
Contributions to SIMPLE IRA plans in 2009 amounted to $4.3 billion or 11
percent of the total contributions made by small employers and their
employees into the plan types we analyzed. By contrast, 401(k)
contributions amounted to $29.2 billion, or 76 percent of all contributions.

Page 8                                                                              GAO-12-459T
Plan Complexity and
Resource Constraints
Were Most Frequently
Cited Barriers to
Retirement Plan

Many Small Employers      Small employers and other stakeholders we interviewed identified various
Find Retirement Plans     plan options, administration requirements, fiduciary responsibilities, and
Complex and Burdensome    top-heavy testing requirements as complex and burdensome—often citing
                          these factors as barriers to sponsoring retirement plans or as reasons for
to Start and Administer   terminating them.

                          Plan options and administration requirements: Small employers and
                          other stakeholders said that plan options and administration requirements
                          are frequently complex and burdensome and discourage some small
                          employers from sponsoring a plan. For example, some small employers
                          and retirement experts said that the broad range of plan types and
                          features makes it difficult for small employers to compare and choose a
                          plan that best meets their needs. Some stakeholders also described the
                          administrative burden on small employers of plan paperwork, such as
                          reviewing complicated quarterly investment reports or complying with
                          federal reporting requirements—like those associated with required
                          annual statements—as particularly burdensome. 15

                          Fiduciary responsibilities: A number of stakeholders indicated that
                          understanding and carrying out a sponsor’s fiduciary responsibilities with
                          respect to managing or controlling plan assets presents significant

                            Most tax-qualified plans are required to annually file Form 5500, developed jointly by
                          Labor, IRS, and the Pension Benefit Guaranty Corporation to satisfy the annual reporting
                          requirements under ERISA and the IRC. ERISA established a reporting and disclosure
                          framework, in part, to protect the interests of participants and beneficiaries by requiring
                          that certain financial and other information be provided to participants and beneficiaries,
                          as well as to the federal government. Modifications or exceptions to the general reporting
                          requirements may be available to some small plans.

                          Page 9                                                                         GAO-12-459T
challenges to some small employers. 16 Some small employer sponsors
found the selection of investment fund choices for their plans particularly
challenging. Further, a number of stakeholders said some small
employers may not have an adequate understanding of their fiduciary
duties and are not always aware of all their responsibilities under the law.

Top-heavy requirements: Top-heavy requirements are more likely to
affect smaller plans (those with fewer than 100 participants) than larger
ones, according to IRS. A number of stakeholders said compliance with
requirements is often burdensome and poses a major barrier to small
employer plan sponsorship. 17 According to some experts, some small
employers with high employee turnover may face an even greater
likelihood of becoming top-heavy as they replace departing employees
while key employees—such as business owners or executives—continue
to contribute to the plan. A number of stakeholders stated that compliance
with top-heavy rules is confusing and can pose significant burdens on
some small employers. For example, some retirement experts said that
small employers whose plans are found to be top-heavy may encounter a
number of additional costs in the effort to make their plans compliant.
These plans can incur additional costs associated with hiring a plan
professional to make corrections to plan documents and instituting a
minimum top-heavy employer contribution for all participating rank-and-
file employees. While sponsors can avoid top-heavy testing by adopting a
safe harbor 401(k) plan that is not subject to top-heavy requirements,
experts pointed out that the employer contributions required for such
plans may offset the advantages of sponsoring such a plan.

   To the extent they qualify as fiduciaries under ERISA, plan sponsors may assume
fiduciary responsibilities, such as the duty to act prudently, solely in the interest of plan
participants and their beneficiaries, and to diversify the investments of the plan.
29 U.S.C. § 1104(a).
  Top-heavy testing is required annually for certain plans and the requirements ensure a
minimum level of benefits are provided to rank-and-file workers in plans that are
sponsored by owner-dominated businesses, where the majority of benefits accrue to “key”
employees, such as owners and top executives. Certain plans, such as SIMPLE IRAs, are
not subject to the top-heavy requirements. 26 U.S.C. § 416.

Page 10                                                                            GAO-12-459T
Federal Guidance Is          Federal agencies provide guidance that can assist small employers in
Available to Address the     addressing some of the challenges they face in starting and maintaining
Complexities Associated      retirement plans. Labor and IRS, often in collaboration with SBA, have
                             produced publications, conducted workshops, and developed online
with Plan Sponsorship But    resources, among other efforts, to assist small employers. However, a
May Lack Visibility among    number of stakeholders, including the IRS Advisory Committee on Tax
Small Employers              Exempt and Government Entities, indicated that many small employers
                             are unaware of federal resources on retirement plans, which may, in part,
                             be due to difficulties in finding useful, relevant information across a
                             number of different federal websites. For example, IRS’s Retirement
                             Plans Navigator, a web-based tool designed to help small employers
                             better understand retirement plan options, is located on a separate
                             website from the rest of the agency’s online plan resources for small
                             employers. Furthermore, Labor and IRS each present retirement plan
                             information separately on their respective websites. Neither agency
                             maintains a central web portal for all information relevant to small
                             employer plan sponsorship, though such portals exist for federal
                             information resources in other areas such as healthcare. 18

Small Employers Identified   Small employers that lack sufficient financial resources, time, and
Lack of Financial            personnel, such as smaller or newer firms, may be unwilling or unable to
Resources, Time, and         sponsor plans.
Personnel as Deterrents to   Financial resources: Small employers, especially those with lower profit
Sponsoring Retirement        margins or an unstable cash flow, could be less willing or less able to
Plans                        sponsor a retirement plan. One-time costs associated with starting a plan
                             and the ongoing costs involved with maintaining the plan—as well as any
                             requirement to match employee contributions or make mandatory
                             contributions to an employee’s account—were cited as barriers to plan
                             sponsorship. Further, small employers we interviewed stated that general
                             economic uncertainty makes them reluctant to commit to such long-term
                             expenses and explained that they needed to reach a certain level of
                             profitability before they would consider sponsoring a plan.

                             Time and personnel: Some small employers stated they may not have
                             sufficient time to administer a plan themselves or lacked the personnel to
                             take on those responsibilities. Further, small employers may not have

                              For example, see: http://www.healthcare.gov/.

                             Page 11                                                         GAO-12-459T
                         time to develop the expertise needed to investigate and choose financial
                         products, select the best investment options, or track their performance.
                         For example, one small employer described how business owners without
                         the financial expertise to compare and select from among different plan
                         options would likely find the experience intimidating.

Small Employers Report   Some small employers we interviewed stated that they may be less likely
That Insufficient        to sponsor a retirement plan if they do not perceive sufficient benefits to
Incentives and Lack of   the business or themselves. For example, several small employers stated
                         that their firms sponsored plans in order to provide owners with a tax-
Employee Demand          deferred retirement savings vehicle and one employer described how the
Discourage Plan          firm annually assesses the plan to determine if it continues to benefit the
Sponsorship              owners. Additionally, a number of small employers stated that employees
                         prioritized healthcare benefits over retirement benefits. Some small
                         employers, such as those who described having younger or lower paid
                         workforces, stated that their employees were less concerned about
                         saving for retirement or were living paycheck to paycheck and did not
                         have funds left over to contribute to a plan. As a result, both types of
                         workers were not demanding retirement benefits.

Plan Service Providers   A number of small employers indicated that they use plan service
Help Small Employers     providers to address various aspects of plan administration, which
Meet Some But Not All    enabled them to overcome some of the challenges of starting and
                         maintaining a plan. For example, one employer noted that her business
Retirement Plan Needs    would not have the time or the expertise to administer its plan without the
                         help of a service provider. While some service providers said they offer
                         affordable plan options and some small employers said the fees service
                         providers charge were affordable, others said they were too high. Further,
                         some stakeholders pointed to other limitations of using service providers,
                         such as the difficulties of choosing providers, setting up a new plan
                         through a provider, switching from one provider to another, as well as the
                         significant responsibilities that may remain with the sponsor, such as
                         managing plan enrollments and separations and carrying out their
                         fiduciary duties, where applicable.

                         Page 12                                                         GAO-12-459T
                      Stakeholders proposed several options to address some of the
Proposed Options to   administrative and financial challenges that inhibit plan sponsorship. 19
Spur Plan             These options included simplifying plan administration rules, revising or
Sponsorship Target    eliminating top-heavy testing requirements, and increasing tax credits.

Simplification,       Simplify plan administration requirements: Some stakeholders
Incentives, and       suggested options that could simplify plan administration requirements.
                      Options included reducing the frequency of statements sent to plan
Education             participants and allowing some required disclosures to be made available
                      solely online. IRS officials stated that the agency is also considering
                      proposals to replace a requirement for some interim amendments 20—
                      which stakeholders have identified as a burden for some small
                      employers—with a requirement for notices to be sent directly to
                      employees, which would reduce the number of times plan documents
                      must be amended and submitted to IRS. 21

                      Revise or eliminate top-heavy testing: A number of stakeholders
                      proposed revising or eliminating top-heavy testing requirements to ease
                      administrative and financial burdens. For example, representatives of the
                      accounting profession told us that top-heavy testing is duplicative
                      because other plan testing requirements help detect and prevent plan
                      discrimination against rank-and-file employees. 22 Representatives of a
                      large service provider told us that lack of plan participation or high
                      turnover among a business’ rank-and file employees frequently cause
                      plans sponsored by small employers to become top-heavy.

                        The key proposals discussed in our full report are not exhaustive, and we did not
                      attempt to quantify the costs and benefits of each proposal or their potential effectiveness
                      in encouraging small employer plan sponsorship.
                        When statutes and regulations change, some sponsors may be required to modify plan
                      documentation and submit it to IRS. Each year since 2004, IRS has published a
                      cumulative list of changes in plan requirements that must be incorporated by plan
                      sponsors. See, for example, IRS Notices 2011-97.
                        Under these proposals, the amendments that would be subject to the less-stringent
                      requirement would be those triggered by changes to laws and regulations but which do
                      not affect plan benefits.
                        For example, some plans must conduct nondiscrimination testing—in addition to top-
                      heavy testing—to ensure that the contributions or benefits provided under the plan do not
                      discriminate in favor of highly compensated employees. See 26 U.S.C. § 401(a)(4) and 26
                      C.F.R. §§ 1.401(a)(4)-1 through 1.401(a)(4)-4. We did not specifically assess duplication
                      between top-heavy and nondiscrimination testing requirements.

                      Page 13                                                                         GAO-12-459T
                            Increase tax credits: Some stakeholders believed that tax credits, in
                            general, are effective in encouraging plan sponsorship, but other
                            stakeholders said that the current tax credit for starting a plan is
                            insufficient. A national organization representing small employers cited
                            tax credits as a top factor in an employer’s decision to sponsor a plan,
                            adding that an employer’s willingness to start a plan depends, to some
                            degree, on the extent to which the tax credit offsets plan-related costs. 23
                            Similarly, some small employers stated that larger tax credits could ease
                            the financial burden of starting a plan by offsetting plan-related costs.
                            Additionally, one small employer said the incentive needs to be larger as
                            sponsorship costs can amount to $2,000 or more per year.

Stakeholders Said More      Numerous stakeholders agreed that the federal government could
Education and Outreach      increase education and outreach efforts to inform small employers about
Are Needed to Increase      plan options and requirements; however, opinions varied on the
                            appropriateness of the federal government’s role in these efforts. Officials
Awareness of Plan Options   of a service provider to small employers stated that, because clients are
and Requirements            generally not aware of the retirement plan options available to them, the
                            federal government should offer more education and outreach to improve
                            awareness of the types of plans that are available and the rules that apply
                            to each. Several small employers also offered ideas. For example, a
                            small employer said the federal government should focus education and
                            outreach efforts on service providers instead of on small employers.
                            Conversely, some small employers said the federal government should
                            have a limited role or no role in providing education and outreach efforts.

                              Currently, small employers that sponsor plans may claim an annual tax credit of up to
                            $500 based on plan startup costs for each of the first 3 years of starting a qualified plan.
                            See 26 U.S.C. § 45E. However, any increase in tax incentives would have to be balanced
                            by the loss of revenue to the federal government. Increasing tax credits to subsidize plan-
                            related costs for small employers would generally reduce the amount of federal tax
                            revenue collected. The Administration’s Fiscal Year 2013 Budget proposed doubling the
                            tax credit limit for small employers starting a plan to $1,000 per year for a maximum of 4
                            years. The Administration estimated that this proposal—along with another proposal for
                            automatic IRA tax credits, would reduce revenue by $15 billion over 10 years, starting in

                            Page 14                                                                        GAO-12-459T
Other Options to          Domestic pension reform proposals from public policy organizations, as
Encourage Plan            well as practices in other countries, include features such as asset
Sponsorship Would         pooling that could reduce the administrative and financial burdens of
                          small employers. For example, one domestic proposal calls for the
Require Broader Reforms   creation of a federally managed and federally guaranteed national
                          savings plan. 24 Under this proposal, participation in the program would
                          generally be mandatory for workers; 25 both employers and employees
                          would contribute to the plan; and plan funds would be pooled and
                          professionally managed. 26 By pooling funds, plan administration would be
                          simplified and administrative costs and asset management fees would be
                          reduced. In addition, Automatic IRAs—which are individual IRAs instead
                          of employer-sponsored plans—are another proposal that draws from
                          several elements of the current retirement system: payroll-deposit saving,
                          automatic enrollment, and IRAs. Such a proposal would provide
                          employers who do not sponsor any retirement plans with a mechanism
                          that allows their employees to save for retirement. 27 However, as we
                          reported in 2009, such proposals pose trade-offs. 28 For example,
                          although a proposal that mandates participation would increase plan
                          sponsorship and coverage for workers, employers might offset the
                          resulting sponsorship costs by reducing workers’ wages and other
                          benefits. Retirement systems in other countries also use asset pooling

                           T. Ghilarducci, Guaranteed Retirement Accounts Toward Retirement Income Security,
                          Economic Policy Institute, Briefing Paper #204 (Nov. 20, 2007).
                            Under this proposal, workers participating in equivalent or better employer DB plans
                          where contributions are at least 5 percent of earnings and benefits take the form of life
                          annuities would be exempt from participating in the guaranteed retirement accounts
                             Recent legislation introduced in Congress, the Small Businesses Add Value for
                          Employees Act (SAVE Act), would also build on the concept of asset pooling by
                          establishing multiple employer plans for small employers, in which separate small
                          employers would pool their resources to offer a single plan. See H.R. 1534, 112th Cong.
                          (introduced Apr. 14, 2011).
                            J. M. Iwry and D. C. John, Pursuing Universal Retirement Security Through Automatic
                          IRAs, Retirement Security Project, No. 2009-03 (2009). In addition, the Administration’s
                          Fiscal Year 2013 Budget also proposed requiring employers in business for at least two
                          years that have more than 10 employees to offer an automatic IRA option. The proposal
                          includes new tax credits for small employers who adopt such arrangements. The
                          Administration estimates that these proposals—including the increased pension startup cost
                          tax credit—would reduce revenue by $15 billion over 10 years, starting in 2013.
                            GAO, Private Pensions: Alternative Approaches Could Address Retirement Risks Faced
                          by Workers but Pose Trade-offs, GAO-09-642 (Washington, D.C.: July 24, 2009).

                          Page 15                                                                         GAO-12-459T
                  and other features that help reduce administrative and financial burdens
                  for small employers. For example, as we previously reported, the
                  predominant pension systems in the Netherlands and Switzerland pool
                  plan assets into pension funds for economies of scale and for lower plan
                  fees. 29 The United Kingdom’s National Employment Savings Trust
                  (NEST) features low fees for participating employers and employees and
                  default investment strategies for plan participants.

                  With a significant portion of the private-sector workforce not covered by a
Conclusions and   pension plan at any one time, retirement security remains a critical issue
Report            for our nation. Based on the limited data available, we found the rate of
                  plan sponsorship among small employers, a segment of the economy
Recommendations   which employs about one third of all private sector workers, was only 14
                  percent in 2009. Although one would expect that the high churn rate of
                  small business formation and dissolution would impede small employer
                  plan sponsorship, it also means that many millions of workers in this
                  sector are without access to an employer-sponsored retirement savings
                  plan. Thus, while remaining sensitive to the financial challenges currently
                  facing our nation, expanding coverage among small employers should be
                  an important consideration of national strategies seeking to strengthen
                  the pension component of retirement income security.

                  Our discussions with small employers and other stakeholders identified a
                  variety of challenges small employers face in sponsoring retirement
                  plans. One initial problem is the inability of small employers to easily
                  obtain useful information on how to establish and maintain plans.
                  Although Labor and IRS already provide small employers with
                  considerable online information about retirement plans, information is
                  scattered across multiple federal websites and portals in a largely
                  uncoordinated fashion, making it difficult for busy employers to navigate
                  and locate what they need. However, even if federal information about
                  retirement plans were more accessible to small employers, our interviews
                  with small employers identified a number of other significant challenges to
                  plan sponsorship, including plan administration requirements that are
                  perceived to be unduly complicated and burdensome, not having
                  sufficient financial and personnel resources to sponsor a plan, and
                  insufficient incentives to create and maintain a plan.


                  Page 16                                                          GAO-12-459T
These challenges, while very real, are also complex and in many
instances may not lend themselves to easy answers. Because the
expertise to address these issues is spread across multiple agencies and
departments that may not always communicate or work together
effectively on these issues, there is the potential that inertia and other
competing priorities will push these issues onto the back burner.

The report we are issuing today recommends the creation of a
multiagency task force, to be overseen by the Department of Labor, that
would explore and analyze these challenges in greater detail, including
ways to make information more accessible, to streamline reporting and
disclosure requirements in a thoughtful manner, and to identify the
appropriateness and effectiveness of existing and proposed tax
incentives and plan designs to boost sponsorship among small
employers. Such a task force could help jump-start sustained action on
what we consider to be an essential element of our nation’s retirement
security challenge and initiate a national dialogue on the critical issues of
pension coverage

Finally, federal agencies’ ability to address the challenges to small
employer plan sponsorship depends in part on the availability of relevant,
timely, and complete data. During our work in estimating the extent of
small employer plan sponsorship, we found that complete data on small
employer plan sponsorship did not exist because IRS did not have the
means to collect information on employers that sponsor SEP IRA plans.
Although there are about 1.5 million SEP IRAs, many of these may be
sponsored by larger businesses, and we simply do not know the
distribution of these plans across all employers. Without a complete
picture of small employer plan sponsorship rates, agencies may find it
difficult to effectively target their research and outreach efforts. Thus, in
our report we also recommend that the Secretary of the Treasury direct
the Commissioner of the Internal Revenue Service to consider modifying
existing tax forms, such as Forms W-2 or 5498, to gather complete and
reliable information about these plan types. Although the challenges that
small employers face in sponsoring plans are significant, they can be
addressed and with appropriate federal action and cooperation, as well as
assistance from the service provider community.

While the Department of Treasury, IRS, Labor, SBA, and the Department
of Commerce generally agreed with our findings and conclusions, Labor
disagreed with our recommendation to create a single web portal for
federal guidance on retirement plans for small employers. Because
federal resources are scattered across different sites, we believe

Page 17                                                            GAO-12-459T
           consolidating plan information onto one web portal can benefit small
           employers. A complete discussion of our recommendations, Labor’s
           comments, and our response are provided in our full report.

           Chairman Kohl and Ranking Member Corker, and Members of the
           Committee, this concludes my prepared remarks. I am happy to answer
           any questions that you or other members of the committee
           may have.

           For further questions on this testimony, please contact me at
           (202) 512-7215. Individuals making key contributions to this testimony
           include Edward Bodine, Kun-Fang Lee, David Lehrer, and David Reed.

           Page 18                                                        GAO-12-459T
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